Rob Dower
Quarterly Commentary

2011 Q2 Comments from the Chief Operating Officer

We are conservatively positioned in the portfolios that we manage for clients and have been for some time, to the extent that we have discretion to be so. This has not been in anticipation of the grand and worrying global economic and political events of the last six months, or even of future bad news. Instead of focusing on macroeconomic forecasting, our investment process means that we spend all of our efforts researching the microeconomic prospects of the companies in our investment universe. We use this careful research to make assessments of the fundamental long-term value of the shares and bonds of these companies. Where there is an appropriate margin of safety between the price of a share and our assessment of its long-term value, we will invest your money in that share. If we can't find enough attractively priced investments, measured on this basis, and we are allowed to do so by our mandates, we retain the balance of the funds entrusted to us in cash. Right now, and purely on the basis I have described above, we find ourselves with more than the usual portion of our balanced and stable mandates being held in cash.

It also happens right now that we are invested in cash at a time when interest rates are at a cyclical low. By simple economic logic, you would think that low interest rates would make shares relatively more attractive than cash. In fact, as is argued in our recent GrayIssue newsletter, penned this month by Duncan Artus, history shows that the real rate of interest at the beginning of a period is a poor predictor of subsequent share returns. You will probably not be surprised that we believe that the only reliable predictor of long-term share returns is the fundamental analysis of company value. Therefore, for the time being, we prefer that your funds are invested in low yielding cash and available to invest in shares or bonds that may be more attractively priced in future, rather than invested in shares that our research shows to be overpriced at present.

This publication's main purpose is to help our investors to understand our investment and business philosophy in practice. In this issue, Delphine Govender considers the concept of investment risk, which we define as the probability of a permanent loss of capital. Delphine discusses how being consistently and consciously mindful of the possibility of a permanent loss of capital has not prevented us from seeking out the best long-term wealth creating investment opportunities for our clients.

Herd behaviour can easily lead to shares being mispriced. Widespread pessimism about a share can drive its price so low that it no longer reflects the company's underlying fundamentals, and understates its prospects. Equally, widespread optimism can result in unjustifiably high valuations. As contrarian investors we try to identify these situations, seeking to buy shares when they are undervalued and sell them (or avoid buying them) when they are overvalued. Ben Preston and Trevor Black from our offshore partner Orbis show how this approach is being played out in Japan today. As bottom-up stock pickers we have identified a number of Japanese companies whose prospects we are very excited about, even though we are not bullish on the Japanese domestic economy.

In the last few months more light has been shed on the revised retirement fund regulations. Please read the piece by Ian Barow and Taryn Hirsch from our legal team to find out if there is any action required from you.

Finally in this issue, in his inspirational update on the Allan Gray Orbis Foundation, Anthony Farr discusses how with its focus on growing leaders and entrepreneurs, the Foundation aims for a highly geared positive effect on the whole economy.

Thank you for your continued trust and confidence in our firm. We do not take it lightly.

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